Reader question:I turned 70 years old in January. When will I have to take my first Required Minimum Distribution (RMD) from my 401k? T.D.
Answer: You have two choices. You can either take it by December 31st, 2012 or you can wait as late as April 1, 2013. When you take your RMD, it will be treated as ordinary income on your tax return. If you wait until April 2013 to take your first RMD, you’ll have to take two distributions that year; one for your 2012 RMD plus your RMD for 2013. Most people prefer to avoid taking two RMDs in a single year.
Reader question: I am 68 and reach 70½ in April 2014. I have about half of my IRA in an annuity while the other half is in mutual funds and stocks. I believe when the time comes that I can dictate where my distribution comes from. I was also under the impression that the distribution can be monthly or would the best option be a one-time distribution at the end of each year starting 2014. Thanks. W.H.
Answer: Yes, the IRS doesn’t care which retirement accounts you take your RMD from so long as they get their money! It is also correct that you can draw out your RMD’s monthly or any way you choose so long as you take out at least the minimum requirement before the end of the year. One caution: failure to take out the minimum triggers a 50% penalty on the withdrawal amount required but not taken! Best to have your financial or tax advisor check you on this calculation.
Reader question: You have often written about the Required Minimum Distributions for retirement accounts when you turn age 70½. How is the RMD figured? P.D.
Answer: Your Required Minimum Distribution is based on a governmental table and since every year that you live, your life expectancy goes down, the percent you must withdraw goes up. For example, according to the governmental table, a seventy-year-old’s factor is 27.4 years. Here’s how you do the calculation: assume your account balances across all of your retirement accounts totaled $100,000 on December 31, 2011. You would divide $100,000 by 27.4 to get $3,650 which is your RMD for 2012. Each year you must recalculate your RMD based on the December 31 balance and the appropriate age-based factor in the governmental table. To review the RMD IRS table, visit the Resource Center at www.WelchGroup.com; click on ‘Links’; then “Required Minimum Distributions”. Note that this table is the most commonly used table but there is a separate table if you’re married and your spouse is more than ten years younger than you as well as a separate table if your IRA is an inherited IRA. Again, best to have your financial or tax advisor check you on this calculation.
Reader question: I want to leave some money to a financially irresponsible child in monthly payments. What is the best strategy? G.S.
Answer: Here are two ways to achieve your goal. First, in your will you could direct your executor to buy a lifetime annuity with his share. With an annuity, an insurance company guarantees to pay an income for as long as the annuitant (your son) lives. Note that with most annuities, the income he receives is fixed and will not rise with inflation so the value of the income stream is likely to diminish over time. Also, with most annuities, at his death, there would be nothing left for his heirs. For larger sums of money, you might consider leaving his share in a trust created under your will. You’d need to name a trustee such as a family member, bank or a trust company to manage the money and direct them to send him regular monthly checks. The advantage of the trust is that the trustee can be more flexible. For example, if your son needed access to principal for medical reasons, the trustee could do this. If the trust was managed well and grew in value over time, the trustee could afford to pay out a higher income and anything remaining in the trust at your son’s death could be passed to his heirs.